Great Turnout at the A&A CPE Event!

Saltmarsh hosted a CPE event on Friday, May 18, at New World Landing in Pensacola, Florida.  Over 80 participants were in attendance representing Saltmarsh, and other offices in the surrounding area.  Guest speaker Russ Madray discussed a range of updates regarding:

• Private Company Financial Reporting
• IFRS in the United States
• FASB
• Audit Standards
• Compilation and Review Standards

Visit our seminars page for more information about upcoming seminars and events at Saltmarsh.

New ERISA Service Provider Disclosure Requirements

On February 3, 2012, the U.S. Department of Labor issued the long-awaited final service provider fee disclosure regulation under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA). The regulation requires certain service providers to make written disclosure of their services and fee arrangements to a responsible plan fiduciary. A responsible plan fiduciary is defined as a fiduciary with authority to cause the plan to enter into, or extend or renew, the contract or arrangement, and typically includes the plan sponsor, officer, trustee or custodian. The disclosure must be made reasonably in advance of entering into, extending, or renewing a contract or service arrangement with that provider. The rule does not require a particular format for the required disclosures, which may be contained in a single document or in multiple documents.

Background
ERISA requires plan fiduciaries, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of the plan's participants and beneficiaries. Responsible plan fiduciaries also must ensure that arrangements with their service providers are "reasonable" and that only "reasonable" compensation is paid for services. According to the Department of Labor, reasonable compensation does not mean that a plan fiduciary needs to select the cheapest provider. An unreasonable arrangement could lead to a prohibited transaction. By requiring covered service providers to disclose their fee arrangements, plan fiduciaries will have a means to compare service providers on an even playing field with all of the services and fees they provide being disclosed and all parties involved identified. The disclosures will also provide plan fiduciaries with knowledge of any potential conflicts of interest.

When is the new Service Provider Disclosure rule effective?
The rule goes into effect on July 1, 2012. This means that covered service providers must provide the required disclosures to the plan fiduciary for any arrangements with a covered plan that will be renewed, extended or entered into as of July 1, 2012.

What does this mean for Plan Fiduciaries?
Plan fiduciaries must be diligent to secure the proper disclosures from covered service providers to the plan and should implement a process to ensure:

·         The sufficiency and accuracy of the information received from the service provider pursuant to the final regulation;

·         Timely receipt of all information, including any changes to previously provided information;

·         Timely requests to service providers for required information, especially with respect to any indirect compensation;

·         A format and disclosure language that is understandable to the plan participant population involved;

·         Appropriate notice and action if the information is not timely provided or is deficient;

·         Appropriate indemnifications with respect to timely compliance; and

·         Appropriate documentation of the receipt of the information, the fiduciaries’ consideration of it, and any actions taken.

Who is a “Covered Service Provider”?
The final regulation defines a covered service provider as “a service provider that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in compensation, direct or indirect, to be received in connection with providing” certain specified services, including fiduciary or registered investment advisor services, and recordkeeping or brokerage services. It also applies to other services for which the covered service provider expects to receive indirect compensation; these other services include accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services. Indirect compensation is compensation received from a source other than the plan sponsor or the plan itself.

What is a “Covered Plan” for purposes of the service provider disclosure rule?
This regulation applies to ERISA-covered defined benefit and defined contributions pension plans, including 403(b) annuity contracts and custodial accounts subject to ERISA. It does not apply to simplified employee pension plans (SEPs), SIMPLE retirement accounts, employee welfare benefit plans, and IRAs. Also exempt are annuity contracts and custodial accounts in 403(b) plans that were issued to employees before January 1, 2009, where no additional contributions have been made, and the contract is fully vested and enforceable by the employee.

What information needs to be disclosed?
Covered service providers are required to disclose (before the parties enter into an agreement for services):

·         All services to be provided under the agreement

·         The compensation or fees to be received for each service

·         The manner of receipt of compensation or fees

·         Information about conflicts of interest

What happens if the Plan Fiduciary (Plan Administrator) does not receive the required disclosures by July 1, 2012?
The disclosure burden is on the service provider. However, if the information is not disclosed by July 1, 2012, then the contract or arrangement between the plan and the service provider will not be deemed reasonable under ERISA, and the plan will have engaged in a prohibited transaction, not only subject to excise taxes but required to be disclosed in both a supplemental schedule to the 2012 Form 5500 filing and the Plan’s 2012 audited financial statements, if the Plan is subject to audit. If this occurs, the plan fiduciary should first make a written request to the covered service provider for the missing information. If that proves unsuccessful, the plan fiduciary should contact the Department of Labor’s Employee Benefits Security Administration (EBSA).

Conclusion
Due to the complexity of the service provider disclosure rules, and the additional reporting requirements for prohibited transactions, we suggest that you contact ERISA counsel to ensure you receive the proper disclosures in a timely manner.

For more information, please contact Judy Fryer at (800) 477-7458.

© 2012 EisnerAmper LLP

Guess Who's 50???

David Lister celebrated his 50th birthday today ... and Saltmarsh staff members went out of their way to make it a special day by decorating his office with relics from his past and items they were sure he'd need in the future ... Happy Birthday, David!  We hope 50 is your best year yet!

David was right at home with his typewriter and tin can phone!

David holding his new denture cream that was lovingly donated by the staff.

David and Charles demonstrate the proper use of the tin can phone.

2012 FBA Consumer Compliance Seminar

 Members of the Bank Advisors team attended the Florida Bankers Association's Annual Consumer Compliance Seminar at the Florida Hotel in Orlando Florida this week.

Saltmarsh hosted a very successful Happy Hour at the Florida Hotel's restaurant, giving the team the opportunity to connect directly with many seminar attendees. Way to go, team!

Kristen and Jennifer talking to seminar attendees.

Manning the booth!

Saltmarsh team members at the Happy Hour.

Kristen talks with a Sarasota banker.

More than 35 bankers attended our Saltmarsh Happy Hour!

Treasury Issues Proposed Regulations Addressing Tax Treatment of Credit Default Swaps

On September 15, 2011, the Treasury issued proposed regulations which would include Credit Default Swaps (“CDS”) in the definition of a Notional Principal Contract (“NPC”) under Treas. Regulation 1-446.3. The proposed regulations also confirm that swaps, including a CDS, would not fall under the Section 1256 regime and proposes significant changes to the existing NPC regulations. The proposals also provide conforming revisions to other relevant regulations.

What is a Credit Default Swap?

Seven years ago, the Treasury issued Notice 2004-52 seeking comments from users and their advisors on how a CDS should be treated for tax purposes. The popular view was that a CDS should be considered an NPC while others suggested treatment as option, or an insurance product, or a guarantee. These new proposed regulations have ended this debate. The proposed regulations, when finalized, will treat most CDS contracts as NPCs.

What changes have been made to the existing NPC regulations?

Under existing law, an NPC is defined as a financial instrument that provides for the payment of amounts by one party to another at specified intervals, calculated by reference to a specified index upon a notional amount, in exchange for specified consideration or a promise to pay a similar amount. The proposed regulations revise this definition by stating that an NPC requires two or more payments to a counterparty. However, the “fixing” of an amount is treated as a payment even if the actual payment is to be made at a later date. The practical effect of this new definition is to prohibit creating an instrument, such as a “bullet” swap, where all of the anticipated payments are netted and made as one back end payment. Rather than looking at the sole ultimate payment, the proposed regulations require an understanding of the calculation of the expected payment. To the extent the ultimate payment consists of two or more calculations (i.e., dividend payments plus change in value) then the instrument will be considered an NPC.

What are some of the negative tax implications of a NPC?

As more instruments will fall under the expanded definition of an NPC, it is important to understand the potential negative tax treatment that these instruments carry. Under existing regulations most NPC payments, excluding a termination payment (i.e., an unscheduled payment made to extinguish the remaining obligations of any party under the contract), will be considered a Section 212 deduction if the taxpayer is not considered to be engaged in a trade or business. Section 212 deductions are considered miscellaneous itemized deductions at the individual tax level, subject to limitation in part or in full, depending on the taxpayer’s facts and circumstances. In addition, these Section 212 deductions are not deductible in many state jurisdictions.

In addition to taking into account the payments described above, proposed regulations issued in 2004 require taxpayers to adopt a method of accounting to take into account contingent nonperiodic payments (i.e., a final swap payment at end of the contract). Prior to issuance of these 2004 regulations, most taxpayers adopted a “wait and see” method on these payments. Under these proposed regulations, taxpayers are required to utilize the complex noncontingent swap method or, as an alternative, adopt a mark-to-market method. In practice, most taxpayers utilize a mark to market approach. This approach requires a taxpayer to annually include as “other” ordinary income any unrealized appreciation each year. Unrealized depreciation would also need to be taken into account as an expense. However, to the extent the taxpayer was not engaged in a trade or business, this amount would be included as a Section 212 deduction. Significant “whipsaw” can result for any taxpayer not engaged in a trade or business, as a taxpayer may be required to pick up ordinary income in a year of appreciation but not get the benefit of the deduction for a future’s year depreciation.

The newly issued proposed regulations do not address whether or not a CDS would be required to adopt the timing and inclusion rules of contingent nonperiodic payments. Presumably, if a CDS contract is now considered to be a NPC, the argument not to consider these as contingent nonperiodic payments are much weaker than were prior to issuance of the new proposed regulations.

To the extent that a taxpayer has not treated a CDS as a NPC, they may need to consider the application of the change in accounting method rules and filing requirements.

Exclusion of Swaps from Section 1256

The proposed regulations have clarified that “swaps” and “similar arrangements” are excluded from Section 1256. There has been previous uncertainty as to the treatment of swaps under provisions of the Dodd-Frank Act.

When is the effective date of the Proposed Regulation?

A hearing is scheduled on the proposed regulation for January 19, 2012. The regulations are intended to be effective for contracts entered into on or after the date the final regulations are published.

For further questions, please contact Saltmarsh, Cleaveland & Gund (850) 435-8300.

© 2011 EisnerAmper LLP